Report Shaping policy for development odi.org Successful trade promotion Lessons from emerging economies Clara Brandi Support for trade-related infrastructure, trade facilitation and effective state–business relations can improve trade performance. The emerging economies China, India and Brazil have successfully supported their trade performance and offer lessons for low-income countries (LICs): Infrastructure: establish a favourable institutional environment, seek domestic institutional investors and foreign investment and support public–private partnerships (PPPs). Trade Facilitation: boost the use of information and communication technology (ICT), promote electronic data interchange (EDI) and single window facilities and minimise physical inspections. State-Business Relations: build capacity for effective state-business relations, address vested interests that resist reform and create a sound framework for competition. June 2013
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Report
Shaping policy for development odi.org
Successful trade promotion
Lessons from emerging economies
Clara Brandi
Support for trade-related infrastructure, trade facilitation and effective
state–business relations can improve trade performance.
The emerging economies China, India and Brazil have successfully
supported their trade performance and offer lessons for low-income
countries (LICs):
Infrastructure: establish a favourable institutional environment, seek
domestic institutional investors and foreign investment and support
public–private partnerships (PPPs).
Trade Facilitation: boost the use of information and communication
technology (ICT), promote electronic data interchange (EDI) and
single window facilities and minimise physical inspections.
State-Business Relations: build capacity for effective state-business
relations, address vested interests that resist reform and create a
sound framework for competition.
June 2013
Acknowledgements
The author is highly grateful for the helpful comments received from a number of experts,
including Yurendra Basnett, Andre Coelho, Cao Jianping, Alexandre Nicolella, Abilash
Puljal, Ram Singh, Surendar Singh, Dirk Willem te Velde and other anonymous reviewers.
The author is also grateful for Roo Griffiths for editing the final paper.
This report is funded by the Development Progress Project. The findings and conclusions
contained within are those of the authors.
ODI Report i
Table of contents
Acknowledgements ii
Abbreviations iii
Executive summary vi
1 Introduction 1
2 Successful trade performance in emerging economies 2
2.1 Trade performance in China, India and Brazil 2 2.2 Introducing the framework for analysis 3
3 Country case: China 10
3.1 Trade-related infrastructure in China 10 3.2 Trade facilitation in China 14 3.3 State–business relations in China 18
4 Country case: India 20
4.1 Trade-related infrastructure in India 20 4.2 Trade facilitation in India 26 4.3 State–business relations in India 28
5 Country case: Brazil 30
5.1 Trade-related infrastructure in Brazil 30 5.2 Trade facilitation in Brazil 33 5.3 State–business relations in Brazil 35
6 Lessons: what can we learn from emergin economies? 36
6.1 Lessons for trade-related infrastructure 36 6.2 Lessons for trade facilitation 40 6.3 Lessons for state–business relations 44
References 47
Tables
Table 1: Selected infrastructure indicators for China, India and Brazil 4 Table 2: Trading Across Borders 2012 – China, India, Brazil 6 Table 3: Logistics Performance Index 2012 7 Table 4: Existence of an umbrella organisation? 8 Table 5: Existence of an investment promotion agency? 9 Table 6: Existence of competition policies? 9 Table 7: Trading Across Borders indicators – China 14
ODI Report ii
Table 8: Customs modernisation in China 15 Table 9: Trading Across Borders indicators – India 26 Table 10: Investment plans – infrastructure in Brazil 30 Table 11: Trading Across Borders indicators – Brazil 33
ODI Report iii
Abbreviations
AAI Airports Authority of India
ACP Accredited Client Programme
ADB Asian Development Bank
ARTNeT Asia-Pacific Research and Training Network on Trade
BNDES Brazilian Development Bank
BOT Build, Operate and Transfer
BRIC Brazil, Russia, India, China
CBEC Central Board of Excise and Customs
CDS Credit Default Swap
CFS Container Freight System
CIRC China Insurance Regulatory Commission
COMESA Common Market for East and Southern Africa
CTTTFP Comprehensive Trade and Transport Facilitation Programme
DIE German Development Institute
DSE Simplified Export Declaration
EAC East African Community
EC European Commission
ECB External Commercial Borrowing
ECDPM European Centre for Development Policy Management
agents. Effective state–business relations can address (i) market and coordination failures
and (ii) government failures and can (iii) reduce policy uncertainty (te Velde, 2010a):
Helping tackle market failures
Effective state–business relations can help solve information-related market and
coordination failures regarding, for example, skills development (Lall, 2001), provision of
infrastructure, technological development (ibid.) and capital markets (Stiglitz, 1996). For
instance, business associations can lobby the government to offer more adequate quality
education, which is not likely to be provided by a fragmented private sector in the context
of incomplete markets (te Velde, 2010a).
Helping tackle government failures
Effective state–business relations (e.g. enshrined in effective competition policy) offer
checks and balances on government policies (te Velde, 2010a). They may also help ensure
that infrastructure provision adheres to high-quality standards and is suitable for the needs
of the market – and thereby prevent, for example, situations in which technology institutes
are supply-driven and de-linked from the private sector (Lall, 2001).
Reducing policy uncertainty
Effective state–business relations may help reduce policy uncertainty, which can have
noteworthy negative impacts on investment, especially when the investment in question
entails large sunk and irreversible costs (Dixit and Pindyck, 1994). Businesses with a good
relation with the government may be able to foresee certain policy decisions, but when the
relation between state and private sector is too close, collusive behaviour may lead to
capture of policy to the benefit of few, not all, firms – which underlines the importance of
examining when these relations are collusive in nature and when they are developmental (te
Velde, 2010a).
The measurement of state–business relations has so far received relatively little attention.
Te Velde (2006) suggests four factors for effective state–business relations:5 the way the
private sector is organised vis-à-vis the public sector; the way the public sector is organised
vis-à-vis the private sector; the practice and institutionalisation of state–business relations;
and the avoidance of harmful collusive behaviour. For example, to ensure credibility, both
the public and the private sector should be organised or institutionalised and a set of
competition principles is required to prevent collusive behaviour. For instance,
measurement of the role of the private sector in state–business relations can be based on the
presence and length of existence of an umbrella organisation (see Table 4) linking
businesses and associations (ibid.). Moreover, measurement of the public sector in state–
business relations can be based on the presence and length of existence of an investment
promotion agency (IPA) (see Table 5) to promote business (ibid.). The presence, length of
existence and effectiveness of laws protecting business practices and competition (see
Table 6) are measures of avoidance of collusive behaviour (ibid.).
Table 4: Existence of an umbrella organisation?
Country Existence Starting date
China Yes (ACFIC) 1953
India Yes (CII) Founded over 117 years ago
Brazil Yes (CNI) 1938
Source:
China http://www.chinachamber.org.cn/publicfiles/business/htmlfiles/qleng/s2569/index.html, India http://www.cii.in/About_Us.aspx?enc=ns9fJzmNKJnsoQCyKqUmaQ, Brazil http://www.cni.org.br/portal/data/pages/FF80808121B629230121B62A6BE10349.htm
5 Te Velde (2006) was the first study to develop quantitative measures of state–business relation
Table 5: Existence of an investment promotion agency?
Country Existence
China Yes (CIPA)
India Yes (Invest India)
Brazil Yes (Apex-Brasil)
Source:
China http://www.fdi.gov.cn/pub/FDI_EN/etcjjj/index.htm,
India http://www.investindia.gov.in/?q=welcome-to-invest-india,
Brazil http://www.waipa.org/members.htm
Table 6: Existence of competition policies?
Country Existence Starting date
China Yes 1993
India Yes 2002
Brazil Yes 1994
Source:
China http://www.apeccp.org.tw/doc/China/Competition/cncom1.html, India http://search.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/AR%282012%2946&docLanguage=En,
Brazil https://www.competitionpolicyinternational.com/brazil-s-new-competition-law-promising-but-challenging
The next three sections turn to three country case studies to review the measures China,
India and Brazil have taken in order to foster trade-related infrastructure, trade facilitation
taxes to the central government, sub-national governments have become keen
to foster economic growth to produce additional revenues (Liu, 2004). To
achieve this goal, they started seeking to mobilise financing for infrastructure
projects, for example by providing guarantees – implicit and explicit – for
bank loans to infrastructure projects and in certain cases subsidies directly for
infrastructure special purpose vehicles (SPVs) to increase profits and credit
ratings (ibid.).
Further initiatives, such as the simplification of government review and
approval procedures and the introduction of performance criteria, contributed
to improving the government capability for the implementation of
infrastructure projects (Liu, 2004).
As a reaction to the 1997 Asian financial crisis, the Chinese government
adopted a proactive fiscal policy and raised public investment in
infrastructure, in part also to satisfy the strong demand for infrastructure
stemming from high growth rates (Liu, 2004). The central government issued
bonds to finance large-scale infrastructure development, which contributed to
sustaining the continued growth of the economy through the crisis. Regarding
the recent global financial crisis, China has launched an even larger economic
stimulus package focusing on infrastructure development.6 China allocated
40% of its $584 billion fiscal stimulus package to infrastructure projects,
focusing on rail, grids, water infrastructure and environmental improvements
(World Bank, 2011b).
Since 2004, China has deregulated the cumbersome and lengthy project
approval system for infrastructure, for example such that government
approval will no longer be needed for projects not funded by the government
(Chen, 2010).
In the context of the 12th Five-Year Plan’s (2011-2015) annual GDP growth
target of 7% and the search for alternative sources of finance, infrastructure
investments are increasingly being opened to private capital, for example by
relaxing the rules on qualified foreign institutional investors (QFIIs) and other
forms of direct and indirect investment (KPMG, 2013; Shao and Yao, 2013).
In September 2012, the National Development and Reform Commission
(NDRC) approved the launch of 55 major infrastructure projects (Back, 2012;
KPMG, 2013).
Public–private partnerships in China
In China, public–private partnerships (PPPs)7 have been implemented for over two
decades.8 From 1990 to 2011, there were 1,018 infrastructure projects with private
participation in China in sectors like energy, telecom, transport, water and sewerage, with a
total investment of $116.4 billion (World Bank, 2013). To promote the implementation of
PPPs in China, a series of policies have been introduced, for example the Opinions on
Acceleration of Privatization Process of Public Facilities in 2002 by the Ministry of
Construction (M. Wang, 2013).
While numerous PPPs have been successful, PPPs frequently give rise to various challenges
in China (e.g. Liu and Yamamoto, 2009). For example, there is no adequate administrative
framework for PPP projects. And, while the approval of a PPP project involves a number of
6 The impact on the private sector’s participation in infrastructure is still unknown but may be very
limited, according to data collected by the Public–Private Infrastructure Advisory Facility (PPIAF) so
far. See Chen (2010). 7 The term ‘PPP’ refers to a number of models of public–private cooperation to mobilise finance and
improve the efficiency of public services and other public functions (Girishankar, 2009). 8 Findings from a recent survey in China indicate that the success factors that are perceived as most
important for PPPs in China refer to a stable macroeconomic environment, shared responsibility
between public and private sectors, a transparent and efficient procurement process, a stable political
and social environment and judicious government control. See Chan et al. (2010).
ODI Report 12
different government departments, it is frequently ambiguous which one is authorised to
negotiate and sign a contract (M. Wang, 2013). Moreover, while China’s Tendering and
Bidding Law requires the tendering process to be open and fair, there are numerous cases of
bribery (Nunns, 2012). Since PPPs represent a relationship between the government and
private actors that resembles a principal-agent relation in which the distribution of
information is asymmetric, they often trigger ‘strategic behavior’ (ten Heuvelhof et al.,
2009). Information asymmetries enable private actors to shirk from making serious work
efforts or refuse to behave in line with the interests of government and can involve adverse
selection ex-ante to the contract period (tendering process) and moral hazard during the
contract period (Rui et al., 2008). Empirical research has shown that a variety of forms of
strategic behavior have emerged in Chinese expressways, including tendering, construction,
operation and maintenance. For instance, in the Shen-Da expressway, 222 jerry-built
locations have been found after 10 years of operation, above all foundation deformation and
cracks in and sinking of the road surface (ibid.).
With the growing interest in PPP projects, the Chinese government has begun to train its
officials to improve their professional skills in order to enhance capacity in PPP operations
or has recruited expert consultants to take account of lacking expertise regarding specific
dimensions of PPP projects (M. Wang, 2013).
China’s plans for infrastructure development are ambitious and the targets are usually
achieved in time:
Roads: The 11th Five-Year Plan envisaged an increase in the National Trunk
Highway System (NTHS) to 65,000 km by 2010 (KPMG, 2009) but, in part
because of the 2008 government stimulus package, at the end of 2010 the
NTHS network was actually over 74,000 km (KPMG, 2013). The 12th Five-
Year Plan has indicated increases in the NTHS with a target of 83,000 km by
2015. While most highway and expressway construction is traditionally
undertaken by local city governments, this puts considerable stress on their
fiscal budgets – yet, since the first Build, Operate and Transfer (BOT)
concessions for PPPs were established in the 1990s, the private sector has
been more actively encouraged to participate in the toll roads sector (KPMG,
2013). Today, more than 70% of the world’s toll roads are within China but
the private sector is still only a small player in greenfield construction,
providing only around 7% of expressway financing in China (Thomas White,
2011).
Railways: On the basis of annual investments of RMB 800 billion in railway
infrastructure, the 12th Five-Year Plan aims at a total high-speed track of
40,000 km to be finished by 2015. However, the July 2011 Wenzhou rail
accident led to a significant reconsideration of planned expenditures,
triggering concerns over the safety and reliability of the railway system as
well as the financial challenges facing the Ministry of Railways (KPMG,
2013). So far, there have been restricted options to invest directly in railway
for the private sector but, given its financial challenges, the Ministry of
Railways announced in 2012 that private capital will receive equal market
entry access (ibid.). Since QFIIs are now permitted to hold railway bonds,
there are now numerous new actors in the market and methods for investing
in the railway sector (ibid.).
Ports: Ports and shipping play an important role in the 12th Five-Year Plan.
Liaoning Jinzhou Port is the first domestic private capital-held coastal port, a
successful case with a record of swift construction and production operations
and positive economic benefits (KPMG, 2013). Today, more and more
foreign investors are showing interest in port construction, complementing
ODI Report 13
the strong involvement of state-owned and domestic privately owned
enterprises.9
Airports: In the period between 2011 and 2015, the opening of 50 new
airports is planned. The latest Catalog for Guidance of Foreign Investment
Industries indicates that foreign investors are permitted to take up to a 49%
equity interest in the construction and operation of airport activities, including
terminals and runways, and that private investors may own up to 100% of
regional airports, but are limited to 49% in major airports such as capital
cities of provinces and certain large cities. So far, one of the hurdles for
private investors airports in China has been the challenge to generate revenue
from secondary activities, such as shop leases and car parking (KPMG,
2013).
Financing infrastructure in China
The major sources of financing for infrastructure projects in China have shifted in the recent
past:
The main source of funding for infrastructure projects have been banking
loans, with state-owned commercial banks and policy banks holding around
80% of total infrastructure loan portfolios and bank financing accounting for
more than half of total infrastructure financing (Walsh et al., 2011).10
Direct fiscal support for infrastructure development is decreasing (Chen,
2010; Walsh et al., 2011).
Corporate bonds have increased in importance but continue to account for a
small part of total financing as the Chinese bond market is still
underdeveloped (Walsh et al., 2011). These bonds have to date mostly been
guaranteed by public banks or other associated companies, which have
increased credit ratings to allow commercial banks and insurance companies
to invest.
It is remarkable that several infrastructure SPVs are listed in the Chinese
stock market, directing funds from the capital market to infrastructure
projects (Walsh et al., 2011).
In 2012, the China Insurance Regulatory Commission (CIRC) decided to
allow insurance companies to invest up to 10% of their balance sheets in both
real estate and private equity (KPMG, 2013).
3.1.3 Summary: infrastructure in China
China’s approach to infrastructure development can be summarised as follows: China has
long been the world’s largest investor in infrastructure (Syed and Walsh, 2012). Chinese
infrastructure development is characterised by strong coordination between policymaking
and implementing and the presence of both market-based arrangements as well as
traditional centrally planned command economy elements. This approach has been
successful since final decision-making authority has continued to be with the central
government and since this central control has made it possible to be less risk-averse and to
defy the market economy when needed. Chinese reforms have included making use of a
trial-and-error approach and have also focused on boosting private and foreign investment
against a background of limited foreign participation in Chinese infrastructure as of now.
The focus is on planning coherent investment, regularly re-examining infrastructure gaps
and reorienting resources (Bredenkamp and Nord, 2010).
9 One example of a successful mutual partnership approach in China is the case of the Maersk Group
and Ningbo Port signing an agreement to mutually invest and manage parts of Meilong Pier at the
Meishan-bonded harbour area (KPMG, 2013). 10 One of the most significant lenders is the China Development Bank, which was established in 1994
to supply long-term financing for specific projects backed by the state. See Walsh et al. (2011).
ODI Report 14
At the same time, there are challenges. Rapid infrastructure development has at times led to
poor-quality, low-technology service and management (Chuan, 2008). Moreover, recently,
collapsing bridges, roads, dikes and dams have been a huge problem. They are often the
result of corruption among local officials who subcontract work to friends or inexperienced
firms (Nunns, 2012). Between 2009 and 2011, more than 15,000 Chinese officials were
punished for construction-related corruption or dereliction of duty (Yuan, 2011), which
often occurs in areas related to infrastructure projects, such as land-use approval or public
bidding (Xinhua, 2011).
So far, public banks have provided most of the required long-term financing for
infrastructure investments in the context of implicit local government guarantees and bond
insurance provided by publicly owned banks (Walsh et al., 2011). Private financing
increases but deficiencies in the legal and regulatory framework, with slow approval
processes, underdeveloped property rights and restricted means of legal remedy, continue to
be a barrier to more extensive private participation in infrastructure (Brooks and Zhai,
2008).
3.2 Trade facilitation in China
3.2.1 Current state of trade facilitation in China
Trade facilitation in China has been successful and is more advanced than in other large
emerging economies. A look at China’s position in the World Bank’s Doing Business
rankings illustrates the progress that has been achieved. For example, in 2009, China moved
4 positions up to 44 in the Trading Across Borders indicators (see also Table 7). The
documents involved, time and costs in most cases are better or equivalent to the East Asia
and Pacific average.11
Moreover, in 2012, China ranked 26th in terms of the World Bank
LPI, having moved up from 35 in 2007.
Table 7: Trading Across Borders indicators – China
Indicator 2012 2011 2010 2009 2008 2007 2006 2005
Overall ranking 68 60 50 44 48
Documents to export (number) 8 8 8 8 8 8 8 8
Time to export (days) 21 21 21 21 21 21 21 23
Cost to export ($ per container) 580 500 500 500 460 390 390 390
Documents to import (number) 5 5 5 5 6 6 6 6
Time to import (days) 24 24 24 24 24 24 24 26
Cost to import ($ per container) 615 545 545 545 545 430 430 430
Provision via the ‘e-Ports Project’ of data exchange and networked joint
inspection between different government departments and different regions,
enhancing overall performance in ports administration and the efficiency of
import and export procedures for enterprises.
12 See also Tsen (2011).
ODI Report 16
Box 1: Effects of reforming customs clearance in China
As part of its Fast Customs Clearance System during the first reform phase of China Customs, the Chinese government undertook considerable efforts in trade facilitation and establishing new port management and operation mechanisms from 2001 and, as a result, customs clearance efficiency has improved greatly (Wenjing and Wei, 2006). Before the reforms, the average time spent in customs clearance was 2.2 days; after the reforms, the time spent was 1.5 days; similarly, the average time spent in customs clearance in Shenzhen land port for each vehicle transferred to other customs was 30 minutes; after the reforms, it was 1 minute; after the reforms of express customs transfer in the Yangtze River Valley, the number of procedures of customs clearance for exported goods was reduced to 5 from 8, and that for imported goods to 4 from 11, and the number of items for which fees are charged has been reduced to 1 from 3.4.
Second reform phase (2004-2010)
In 2003, Chinese Customs initiated implementation of the second phase of the Modern
Customs System to be undertaken between 2004 and 2010 with the goal of establishing a
‘smart’ customs based on risk management best practices and reforming customs into a
scientifically managed, highly efficient and uncorrupted modern system (Shujie and Shilu,
2010; Wenjing and Wei, 2006). The following are vital elements of China’s strategy in the
second reform phase (Wenjing and Wei, 2006).
Adoption of the WTO valuation agreement principles: Starting 1 January 2002, China
Customs began full implementation of the WTO valuation agreement (Wenjing and Wei,
2006).
Automation and information technology in customs clearance: China Customs used
more and more technology for administrative management and customs clearance
supervision. For example, electronic processing limits the time and cost of international
trade substantially (Shujie and Shilu, 2010).
Electronic Data Interchange (EDI):13
EDI Customs Clearance Engineering was
established formally in China in 1992, having being updated in 2005 and generating the
following results (Mengchao, 2011). Up to 2010, the number of enterprise users exceeded
0.55 million. Daily processing capacity reaches 1.2 million items. In 2009, the amount of
online taxation payment to customs was RMB 39.06 billion nationwide, accounting for
42.4% of taxation entering into the national treasury. This had tripled compared with 2004.
In 2008, the export receipt and settlement of exchange online verification system was
running successfully. By the end of 2010, it registered over $65 billion.
Paperless customs clearance: The highly successful paperless clearance procedures have
been expanded to most customs districts of the General Administration of Customs since
their launch in 2001. The paperless process has greatly increased the speed of customs
clearance: the minimum time spent for exported goods is 5 minutes, and the maximum is
2.85 hours, while the minimum time spent for imported goods is 3 hours, with a maximum
of 32.25 hours (Wenjing and Wei, 2006).
Electronic customs: Since 2004, enterprises have been able to complete customs
procedures over the internet, including declarations for customs clearance, submissions for
examination, verification and writing-off of settlements and sales of exchange and export
refunds. Since 2006, 90% of export declarations for customs clearance have been able to be
completed within 1 day, and 80% of import declarations for customs clearance within 2
days (Wenjing and Wei, 2006).
13 EDI is the structured transmission of data between organisations by electronic means and is used to
transfer electronic documents or business data from one computer system to another computer system,
that is, from one trading partner to another trading partner, without human intervention.
ODI Report 17
Electronic ports: The General Administration of Customs has established 41 electronic
port data branch centres, enabling import exchange payment verification, export exchange
The majority of infrastructure reforms in India did not start until the late 1980s and early
1990s.
After the 1991 fiscal crisis in India, the government implemented a number of
reforms to improve the global competitiveness of the economy,
acknowledging that the positive impact of these measures would decisively
hinge on the enhancement of the Indian infrastructure (Kim and Nangia,
2010).16
In other words, the development of infrastructure in India was fuelled
by the major economic reforms of the Indian economy, which unravelled the
former command and control regime, liberalised trade by reducing both tariffs
and non-tariff barriers and shifted the Indian state towards a closer and more
collaborative relationship with private capital, including FDI.
In 1994, the government set up an Expert Group for infrastructure
development, which suggested that, for India to maintain its annual target
growth, a threefold increase in infrastructure investments in absolute levels
would be needed and offered a number of recommendation to promote this
investment, including privatization (Kim and Nangia, 2010).17
In the early 1990s, the telecom sector was the first one to permit entry of
private sector firms in both basic and cellular telephone systems (Kim and
Nangia, 2010).
The government has actively encouraged the PPP model in light of the
benefits it offers in terms of cost savings, access to specialised expertise and
proprietary technology, sharing of risks with the private sector and leveraging
its own share in infrastructure investments.
Public–private partnerships in India
India currently attracts more private investment to its infrastructure sectors than China and
Brazil. In 2010, $75 billion was invested in Indian infrastructure-related PPPs (Urban Land
Institute and Ernst & Young, 2012). PPPs have a long history in India (ADB and Economist
Intelligence Unit, 2012). Case studies of Indian PPPs can be examined to learn from
positive and negative aspects of these examples (Bandgar, 2012).
Many PPPs in India have been successful and offer potential lessons for less developed
countries. For example, PPPs have been a success story in the context of a number of
airports that have been built. India made use of the PPP model to upgrade and develop the
two primary gateways at Delhi and Mumbai, and to construct greenfield facilities in
Bangalore and Hyderabad (CAPA, 2012; Ministry of Finance, 2009). Prior to this, all
airports in the country, with the exception of Cochin Airport, were operated by the state-
owned Airports Authority of India (AAI).
To boost PPPs in infrastructure, the government has introduced two main initiatives:
viability gap funding and the India Infrastructure Finance Company Limited (IIFCL) to
satisfy the long-term financing needs of potential investors (Gupta, 2009). Since 2009, the
awarding of PPP projects in India is subject to requirements such as strategic planning, pre-
feasibility analysis, financial viability and PPP suitability, generating a process that is
regarded as time-consuming but fair and predictable (City of London, 2012). The
introduction of Model Concession Agreements in 2004 has contributed to enhancing risk
allocation (ADB and Economist Intelligence Unit, 2012).
16 Until 1994, the Indian government did not have a comprehensive framework for infrastructure and
the infrastructure planning, regulation, production and supply were typically dominated by public
sector state-owned enterprises (SOEs), which generated accountability challenges owing to strong
interference by political ‘bosses’ (Virmani, 2005). 17 The Expert Group’s findings were presented to the government in June 1996 in a report titled ‘The
India Infrastructure Report: Policy Imperatives for Growth and Welfare’.
While India’s PPP framework has improved, a number of challenges remain relevant
(Lakshmanan, 2008). Recently, the draft of a national PPP policy was released, proposing that
each PPP project would be vetted at the central government level, but, as of now, there is no
PPP act at a federal level in India (ADB and Economist Intelligence Unit, 2012; FICCI and
Ernst & Young, 2012). Moreover, there is a lack of capacity to structure and undertake PPPs
and there are many challenges due to red tape and land acquisition problems (City of
London, 2012).
Recently, the Indian government took a range of additional measures to promote
development of infrastructure by setting a number of sectoral infrastructure targets,
improving the monitoring of PPPs and easing land transfer between government agencies
for PPP projects (Urban Land Institute and Ernst & Young, 2012).
Encouraging private investment in infrastructure remains a challenge. In the 10th Five-Year
Plan (2002-2007), a promising start was made by the central government with PPP in many
trade-related infrastructure sectors (Gupta, 2009). Between 2007 and 2012, $225 billion
(equivalent to 12% of GDP) was invested by the private sector in infrastructure, much of it
on the basis of PPPs (Economist, 2012). Yet the targets have not been achieved as planned
(FICCI National Committee on Infrastructure and Ernst & Young, 2012). There were many
hold-ups and merely a quarter of all projects are on or ahead of schedule (Economist, 2012).
Railways: In a major initiative in PPP, container movement, until then a
monopoly of the Container Corporation of India, has been thrown open to
competition and a number of major private sector entities have been licensed
for running container trains on tracks owned by Indian Railways.18
But many
projects are behind schedule owing to insufficient funds, misplaced
investment priorities, lack of timely reforms in organisations and inability to
attract private investments, and only 1,750 km of new lines was added from
2006 to 2011, as compared with 14,000 in China (FICCI National Committee
on Infrastructure and Ernst & Young, 2012).
Ports: The 11th Plan included a larger programme of port capacity expansion
based on PPP.19
The Maritime Agenda proposes an investment of Rs. 1,280
billion in 424 projects in major ports and Rs. 1,680 billion in non-major ports
by 2020 with a highly ambitious target of more than 80% of the investment
coming from the private sector, given the experience of PPP projects in the
ports sector and challenges such as environmental clearances, slow
bureaucratic procedures and poor connectivity to the hinterland (FICCI
National Committee on Infrastructure and Ernst & Young, 2012). In 2011-
2012, the capacity addition was almost nil in major ports for cargo handling
(Sreeja, 2012).
Airports: It was planned to involve the private sector in non-aeronautical
activities at 35 non-metro airports and in the development of greenfield
‘merchant’ airports and about 300 airstrips.20
Roads: The central as well as a few state governments have engaged the
private sector in road development, for instance as part of the National
Highways Development Project (NHDP) (see also below).21
Yet the
ambitious targets have not been met yet. In 2009-2010, the National
Highways Authority of India was able to build highways at an average of
13.72 km per day, a number that dropped to an average of 10.39 km per day
in 2011-2012, clearly falling short of the much higher original target of 20 km
18 For more information, see www.indianrailways.gov.in 19 For more information, see www.shipping.nic.in. 20 For more information, see www.aai.aero and www.dgca.nic.in. 21 For more information, see www.nhai.org.
documents are processed electronically (WTO, 2011). EDI facilities are available at
92 customs offices and the facility of ‘around the clock’ electronic filing of customs
documents for clearance of goods is possible at an increasing number of centres.22
Electronic commerce portal
In 2002, India further facilitated trade by implementing an electronic commerce portal,
ICEGATE (Indian Customs and Excise Gateway), which eases the electronic filing of
import and export documents and related electronic exchange between customs and the
trader, offering a choice of means of communication, including the internet, and a helpdesk
on a 24x7 basis (Dominic et al., 2012). There has been a steady increase in filing of customs
documents through ICEGATE since its launch and currently about 8,000 import and export
declarations are being filed daily by making use of the facility (ibid.).
National Import Data Base
Moreover, since 2002, the NIDB has been used by the Directorate General of Valuation to
accelerate valuation procedures by allowing a comparison with data gathered on the value
of recent imports of comparable goods (WTO, 2007). This permits customs officers to take
well-informed decisions on valuation and classification of imported goods and to avoid loss
of revenue on account of under-valuation or mis-declaration (Chaturvedi, 2007; Dominic et
al., 2012; Srivastav, 2003).
Risk management system
In 2005, India initiated a risk management system (RMS) in order to decide which
containers to inspect and selectively screen only high- and medium-risk cargo for customs
examination (WTO, 2011). The RMS for processing imports is operational at 48 customs
offices; some 85% of India’s imports are processed via this system. The launch of the RMS
in major customs locations has cut back the average time taken by customs to eight hours,
with two hours for assessment and six hours for examination (ibid.).
Accredited Client Programme
The ACP guarantees clients who are assessed as having a good track record of being highly
compliant facilitation by the RMS, which secures faster delivery and reduced transaction
costs (Chaturvedi, 2007; Dominic et al., 2012). Customs also works with the custodians at
various ports/airports to ensure that the cargo of such units is delivered quickly. As of early
2011, 250 ACP importers are allowed to self-assess their consignments with no need for
examination, in line with India’s commitments to simplify and harmonise customs'
procedures under the revised Kyoto Convention (WTO, 2011).23
Trade facilitation in special economic zones
SEZs offer single window clearance, automation of procedures and trade facilitating on
self-certification basis (Tantri and Kumar, 2011).
Trade facilitation in the context of regional integration
In order to increase trade with neighbouring countries, India has initiated a number of
measures in the context of regional integration, including the establishment of integrated
checkpoints on the border with Pakistan, Bangladesh, Nepal and Myanmar (Mehta, 2011).
Training provided to customs staff
The CBEC has launched a number of measures to train officers so they can deal well with
reforms and streamlining of the various trade measures, which may eventually contribute to
faster clearance of goods (Wenjing and Wei, 2006).
22 There are some 300 customs posts in India. According to the authorities, posts that are not
automated are mainly remote land stations where trade is almost zero. 23 See Customs Circulars Nos 42/2005 and 43/2005, 24 November 2005, and Chaturvedi (2009).
ODI Report 28
Facilitating trade at the operational level
In addition to reforms at the policy level, a number of additional trade facilitation measures
have been launched at the operational level by various customs houses. For example,
Jawaharlar Port has introduced a system of e-payment of duty and customs examinations
through computer system even after office hours to speed up the clearance process.
4.2.3 Summary: trade facilitation in India
In India, trade procedures have become more efficient. In the period between 2005 and
2011, the time needed to finish all trade procedures involved in moving goods from factory
to ship at the nearest seaport – or vice versa – was cut back by more than 40%, with an 18%
reduction being the average for developing economies in the Asia-Pacific region (ARTNeT
and UNNExT, 2012).24
Especially the implementation of the EDI system in 1994, and the
RMS in 2005 at India’s major customs offices, has increased the efficiency of border
procedures. The number of documents processed through the EDI grew from 3.2 million in
2008-2009 to 8 million in 2010-2011. Between 2007 and 2011, the average time for the
completion of export procedures was reduced by 10 days (17 days down from 27 days in
2007), which entails 8 days for document preparation and 2 days for customs clearance and
technical inspections (WTO, 2011).
India’s ongoing Foreign Trade Policy (FTP) 2009-2014 states that the country aims to turn
around the downwards trend of exports (De, 2011). In order to bring down transaction costs,
two important policy measures undertaken through FTP 2009-2014 are further procedural
rationalisation and, as mentioned above, enhancement in infrastructure related to exports
(De, 2011).
4.3 State–business relations in India
In the period between independence and the early 1990s, the Indian economy resembled a
‘command and control regime’.25
Such a dirigiste system, where the state effectively shaped
the investment decisions of the private sector, gave rise to a collusive and rent-seeking
relationship between the state and the private sector, which in turn had considerable
negative effects for the economic performance of India (Sen, 2010). In the 1980s, the
relationship between the state and the private sector changed drastically, which in turn
enabled India’s sustained economic growth in the following years (Kohli, 2006a; 2006b).
After early signs of a shift after the early 1980s, in 1991 the Indian economy was subject to
major economic reforms, the command and control regime ended and the relationship
between the Indian state and private capital changed from a hostile towards a closer and
more collaborative relationship with the business sector (Sen, 2010). The Indian reforms
were targeted at enhancing the economy’s flexibility after a balance of payments crisis and
focused on abolishing restrictions on manufacturing and trade. During the 1990s, licensing
requirements were lifted across many industries, tariffs fell and India’s financial markets
began to open to the world (Syed and Walsh, 2012).
Recent research has shown that the evolution of state–business relations has varied across
Indian states and that these regional variations in the quality or effectiveness of state–
business relations can account for variations in economic growth across Indian states (Calì
and Sen, 2009). Calì and Sen (2009) also find that the establishment of formal organisations
as such does not seem to foster economic growth but that the key elements of the Indian
state–business relations that stimulate economic growth are those linked to the actual
interactions between states and businesses, which in turn underlines that business
24 South-East Asia made the most progress, cutting its average time for completing trade procedures to
20 days. Cambodia and Thailand cut their time by more than 40% during the same period. India and
Pakistan achieved improvements of a similar magnitude, although trade procedures in South and
South-West Asia still take 50% more time to complete than in South-East Asia (30 days on average). 25 This account of state–business relations in India is based on Sen (2010).
ODI Report 29
associations should focus on enhancing more collaborative relations between states and the
private sector. At the industry and firm levels, recent research finds comparable positive
impacts of effective state–business relations on industrial productivity growth and
manufacturing firm performance in India (Kathuria et al., 2010). The case of India also
demonstrates that a negative collusive relationship can be modified into a more
collaborative relationship if leaders and elites manage to form developmental coalitions
(Alivelu et al., 2009).
In 2005, the government of India passed the Special Economic Zones Act to promote
exports, investments and employment generation on the basis of various fiscal benefits and
relaxations.26
Most Indian SEZs are related to IT and IT-enabled services. Roadblocks for
SEZs in India are land acquisition issues and inadequate infrastructure outside the notified
SEZ areas. However, overall, the scheme has been very successful, receiving a good
response from developers and investors, and thus offers lessons for LICs (Maharashtra
Economic Development Council and PricewaterhouseCoopers, 2008).
26 For more details, see also www.sezindia.nic.in.
The current state of Brazil’s infrastructure is relatively good in comparison with other South
American countries (Mourougane and Pisu, 2011). The assessment is less positive
compared with other regions in the world but there has been a process of catching-up in
certain sectors such as telecommunications (Calderón and Servén, 2004). The present state
of infrastructure in Brazil mirrors the lack of adequate investment over at least three
decades (Mourougane and Pisu, 2011). Infrastructure spending in Brazil has by and large
been decreasing over the past 40 years, averaging 5.4% of GDP during the 1970s, 3.6% in
the 1980s, 2.3% in the 1990s and 2.1% in the 2000s. Brazil’s overall investment-to-GDP
ratio has averaged only 17% over the past five years, well below the levels of China (44%)
and also India (38%) and Russia (24%), the other BRIC economies (Morgan Stanley, 2010).
Table 10: Investment plans – infrastructure in Brazil
2006-2009 2011-2014
Sector R$ billions R$ billions % of 2010 GDP Share
Electricity 92 139 1.0 18.4
Telecommunications 62 70 0.5 9.3
Sanitation 26 41 0.3 5.4
Railways 20 60 0.4 7.9
Highways 30 51 0.4 6.7
Ports 5 18 0.1 2.4
Oil and gas 205 378 2.6 49.9
Source: BNDES (2011)
5.1.2 Support to infrastructure in Brazil
Growth Acceleration Programme (PAC)
In light of the Brazilian infrastructure challenges, in 2007 former President Luiz Inacio Lula
da Silva launched a large infrastructure programme and created PAC, then in 2010 a follow-
up programme (Centre for Development and Enterprise, 2012; Mourougane and Pisu, 2011;
Walsh et al., 2011).27
The objective was to raise infrastructure investment and advance
coordination among the numerous institutions engaged in infrastructure policy, among
others, on the basis of the following measures (Mourougane and Pisu, 2011):
27 These programmes replaced the Investment Pilot Project announced in 2005. PAC is managed by a
steering committee comprising the ministers of the Presidency, Planning and Finance. An executive
group is responsible for PAC’s implementation and a secretariat helps set targets in PAC projects.
ODI Report 31
PAC envisaged $251 billion in additional infrastructure and other investment
over four years, to be financed by the government ($34 billion) as well as
public enterprises and the private sector.28
The first PAC had final outlays of almost R$570 billion for the 2007-2010
period (Lewis, 2012).
PAC exempted specific capital and goods related to infrastructure investment
and construction from some federal taxation through the Special Incentive
Regime for Infrastructure Development (REIDI), and aimed at creating a tax-
exempt national investment fund to finance infrastructure projects.
PAC further strengthened the position of the publicly owned Brazilian
Development Bank (BNDES), which dominates long-term private sector
corporate finance (see also below). The bank decreased spreads for
infrastructure projects strongly and prolonged the terms of some of its loans.
From only $3.4 billion in 2003, BNDES lending for infrastructure projects
rose to $17.5 billion 2008 and $25 billion in 2009, leading to an increase in
the GDP share of public investment to an estimated 3.2% in 2010, with more
than 60% of this investment coming from SOEs.
To tackle contradictory developments at the economy-wide level, the
government has increased resources to monitor progress in the infrastructure
programmes and publishes a regular progress report.
In 2011, the management and the implementation of PAC was moved to the
Ministry of Planning, but if coordination continues to be a challenge the
authorities could deliberate establishing a dedicated agency to oversee
infrastructure developments, which would evaluate projects on a common
basis and coordinate infrastructure policies by advising central and local
governments on priorities and possible financing mechanisms.
Under its PAC 2 Accelerated Growth Programme, the government has committed to
spending R$959 billion on infrastructure projects by 2014 and R$631 billion beyond 2014,
capital which is channelled in part through BNDES (Williams, 2011). By late 2012, PAC 2
had reached 40.4% of its investment goal for the period 2011-2014, spending R$385.9
billion ($186 billion) on road, rail, port, power and other projects, according to the Planning
Ministry (Lewis, 2012).29
The government regards PPPs as an essential approach to attain
PAC’s targets (see also below).
Activities regarding the 2014 World Cup and the 2016 Olympic Games
For the 2014 World Cup and the 2016 Olympic Games, Brazil is in the process of an
enormous transformation. In 2011, the government introduced a policy to accelerate
projects by holding a single tender for both public works’ design and construction of urban
transportation, airport and stadiums projects related to the World Cup. In Rio de Janeiro,
Transolímpica is one of the key projects to improve the city’s public transportation for the
Olympic Games, with a 23 km highway with six lanes – three in each direction with two of
the tracks to be used exclusively by buses through a Bus Rapid Transit scheme with 18
stations – an affordable transport solution that could be replicated in other less developed
countries (KPMG International, 2012). In São Paulo, Line 4 of the Metro was the first PPP
signed by the state, planned to be carrying nearly 1 million people per day (ibid.). The $1
billion Embraport Project, based in the city of Santos in São Paulo, is a privately owned port
with incorporated road and rail infrastructure which will be the largest-ever port project
28 In this sense, it is similar to India’s five-year plans, although in Brazil most public sector investment
will be undertaken by public enterprises rather than directly by national and local governments. 29 For example, PAC 2 projects have already spent R$26.8 billion to add 1,120 km of new highways
throughout Brazil, and are currently improving 22 airports. Airport capacity has been increased by 13
million passengers a year by PAC 2 spending. Electricity generating capacity has been increased by
4,244 megawatt hours thanks to spending of R$87.6 billion on construction of 52 plants since the start
policy and legal and regulatory reforms (ibid.). Moreover, one lesson for LICs to consider
might be to begin with lighter forms of PPPs, such as operations and management (O&M)
contracts that are easier to enact, carry lower risks and are more likely to be successful, and
then, as the environment for and understanding of PPPs improves, to shift towards more
complex forms of partnerships with the BOT approach (Luthra, 2012). Guidebooks and
toolkits on PPPs can offer additional help (e.g. Thomsen, 2005; UNESCAP, 2011).
6.2 Lessons for trade facilitation
There are two key policy measures to reduce trade transaction costs: the enhancement of
trade-related infrastructure, as discussed above, and trade facilitation, above all the
rationalisation of trade procedures (ARTNeT and UNNExT, 2012). While the former
typically demands huge amounts of capital, which tends to be scarce in LICs, the latter can
be implemented swiftly once the political will is present. Furthermore, reforming trade
procedures enable making better use of existing trade-related infrastructure in LICs. For
example, it can allow customs clearance checkpoints to handle more transactions as traded
goods move faster through the facilities. The modernisation of trade procedures can
therefore be regarded as key to improving trade performance in LICs. Faster, predictable
and transparent customs clearance greatly helps traders lower costs and enhance their
supply chain management (IFC, 2006).
6.2.1 The political economy of trade facilitation
At the same time, the so-called ‘soft trade facilitation’ is frequently highly difficult to put
into practice, since it often goes against strong vested interest and is implemented without
the ‘ribbon-cutting ceremonies’ that make it attractive for politicians and donors (Rippel,
38 With regard to FDI, the case of China might offer some lessons. See Tseng and Zebregs (2002).
ODI Report 41
2011). One key questions is thus how such political economy challenges might be overcome
in order to promote trade facilitation and other relevant reforms (Lui and Siziba, 2012). In
this context, it is essential to first identify the most relevant actors as well as their
motivations and interests. As a second step, it is important to analyse governance relations
at the sector level to evaluate the feasibility of reforms and identify what drives or hinders
reform as well as the wider context within which reform is supposed to happen. These
analyses may lead to a change in focus, for example by moving from an exclusive focus on
regional or multilateral trade facilitation protocols to concentrating on the demand side for
policy actions from interest groups or ‘showcase’ projects that might reduce the opposition
to reforms (ibid.).
6.2.2 Applying ICT and other modern technology, paperless trade procedures and single window facilities
Results of recent non-tariff policy-related trade costs modelling exercises underline that
enhancing access to information and communication technology (ICT) facilities is essential
to reducing trade costs (Duval and Utoktham, 2011). China, India and Brazil have
successfully applied ICT and focused on paperless trade and single window facilities for
submission and processing of information and documents. The implementation of EDI and
single window systems enables simplifying documentary requirements and limiting the
complexity of documents submission. A single window, for instance, enables data and
documentation relating to export or import processes and transit-related regulatory
requirements to be submitted just once to a single point, often through one electronic portal,
allowing each agency involved to access the information it requires from this single
repository in accordance with agreed inter-agency protocols (Tsen, 2011).
Box 2: The Chirundu one-stop border post
The Chirundu one-stop border post between Zambia and Zimbabwe was officially inaugurated in December 2009. The objective was to tackle the challenges of one of the busiest border crossings in the region, where transporters experienced considerable delays owing to clearance of consolidated loads and procedures by the revenue authorities at the border (Curtis, 2009). The establishment of the one-stop border post has led to significant improvements and can be regarded as a success. For example, passengers and commercial traffic stop only once to complete border formalities for both countries, and waiting times for commercial traffic have been reduced from about two to three days to just two hours. In order for comparable initiatives to be established, sufficient political will and adequate budgets are needed.
Source: Kwaranda (2010)
6.2.3 One-stop border posts and trade corridors
Notwithstanding the verifiable benefits that they generate, only a single one-stop border
post (see Box 2) has been implemented in all of Africa (Lui and Siziba, 2012). One-stop
border posts, jointly managed by neighbouring countries, reduce duplication of procedures,
allow for greater efficiency and improve transit times, and are often connected to other
initiatives such as trade corridors and efforts towards more integrated and coordinated
border management (Barka, 2012).39
Trade corridors have been at the centre of considerable discussion over the past years,
above all across in Africa. The ability to transit goods and people easily along a well-
structured trade corridor, with no delays or hindrances such as borders or any other barrier
39 There is considerable potential for one-stop border posts in Africa (see Barka, 2012). In Africa, the
UK Department for International Development and the Japan International Cooperation Agency have
been working with the East African Community (EAC), the Southern African Development
Community (SADC) and the Common Market for East and Southern Africa (COMESA) to establish
the one-stop border posts in the context of the North–South transit corridor. In South-East Asia, the
Greater Mekong Subregion’s Cross-Border Transit Agreement entails implementation of single-stop
inspection and single window inspection points.
ODI Report 42
to trade, is a demanding vision that will need a concerted effort and support from every
level of the governments within the recognised economic regions.
6.2.4 Risk management techniques
Inspection frequently adds substantially to the time needed for export and import processes
and affects their timeliness and predictability, which in turn are highly important for firms
that aim at being part of international production networks (ARTNeT and UNNExT, 2012).
In accordance with key international agreements concerning modernisation of customs
controls, such as the Revised Kyoto Convention and the WCO SAFE Framework of
Standards, many customs agencies are now procuring and employing cargo and baggage
scanners that utilise both x-ray and gamma ray sources to augment the control of
passengers’ baggage and cargoes. Referred to under the generic name of ‘non-intrusive
inspection’, such equipment, if utilised correctly, can offer an efficient means of detecting
high-risk cargo at the point of import or export without the need to undertake what are often
lengthy and costly resource-intensive physical inspections. The Chinese, Indian and
Brazilian experiences illustrate the benefits of implementing risk management techniques in
order to reduce the need for inspections.
At the same time, scanning equipment is costly and may, for example, not make adequate
sense in low-volume ports, as the case of extraordinarily high scanning charges in Maputo,
Mozambique, illustrates (Bolnick, 2007). However, some of the resulting costs might be
transferable to other agencies or stakeholders and the cost of procurement and maintenance
of IT systems and x-ray scanners may be financed through processing fees (IFC, 2006).
6.2.5 Harmonisation and simplification of required documents
The most substantial part of the time needed for an import or export process is taken up by
the preparation of the required documents and exchange of information among the relevant
different parties (ARTNeT and UNNExT, 2012). For LICs, the trade facilitation measure
that yields the greatest increases in trade flows is the harmonisation and simplification of
documents (OECD, 2012). This entails both the extent of harmonisation of trade
documents, through reliance on international standards and simplification of documentary
requirements, through the use of copies and the reduction of the number and complexity of
required documentation. For instance, exports to different destinations frequently require
different types of documentation, which – more than mere number of documents – causes
delays. Differences in documentary requirements should be cut back by aligning national
procedures with international standards and conventions. For instance, to prepare for
accession to WTO, China Customs amended its Customs Law, which was based on
international standards and best practices and incorporated, for instance, the key principles
and standards of the Revised Kyoto Convention.
6.2.6 Industry- and sector-specific trade facilitation
The duration of the trade process varies and is strongly conditional on the kinds of goods
being traded, as product-specific case studies underline. The trade procedure is especially
complex for agricultural goods and food products, which are of high relevance in many
LICs, and usually involve complex sampling and testing procedures, which make up almost
half of the total export time in some cases (ARTNeT and UNNExT, 2012). Another
important case for LICs relates to low-valued exports. As mentioned above, Brazil has had
positive experiences with special trade facilitation policies for low-valued exports policies,
which seek to tackle complex and expensive export formalities and the absence of